Retail ecommerce is one of those categories that investors often express dislike for. Taking a superficial look at the space, it's not hard to see why given that many companies have tried and failed to build sustainable businesses over the years. But, as always, there is more going on than meets the eye. Let's peel back the onion and see what observations and lessons we can uncover. The best way is to pick apart each space and look at the key features:

Subscription Commerce

Theme: Increase customer lifetime value via higher purchase rates driven by membership model. Subscription is the model of choice for digital services such as dating, credit monitoring and media. It was eventually adapted to commerce and traditional goods categories.

Positives: Predictability in revenue streams and thus better inventory optimization. If you know how many subscribers you have, then you will have a good sense for how much revenue you will do each month. You will also be able to plan inventory better and prioritize particular products. If the service is sticky, consumers will generate strong marketing payback and LTVs. The model works particularly well for highly recurring behaviors or for goods that need to be frequently replenished.

Challenges: Can be difficult to justify a subscription model, i.e. if the service is so valuable wouldn't consumers just purchase a la carte? Why force a subscription? Consumers can also feel burned by subscriptions, particularly if opt-out rules are not clear. Additionally, consumers are pretty finicky about subscriptions and their tastes may change, causing them to churn relatively early.

Vertical Integration

Theme: Increase gross margin and become the brand rather than the storefront. Rather than sell someone else's stuff, why not design and manufacture your own products?

Positives: Higher gross margins (i.e. 40-60%) and more control over the business, which leads to increased savings for consumers. Can be more innovative and creative around the brand, perhaps even leveraging celebrity endorsements. Successful businesses can also leverage marketplace data to inform business decisions (i.e. manufacture more red high heels, or target particular products more effectively to consumers). If successful, loyal customers will drive very high LTVs and can become strong brand advocates. It's worth noting that some subscription commerce companies are also vertically integrated.

Challenges: Need to take on "style risk" (betting on what will be trending next year) as well as increased logistics complexity. It has also proven difficult to build an online-only brand and capital intensive.

Flash Sales

Theme: Deep discounts on known brands with scarcity and sense of urgency. Traditional flash sales businesses became the opaque liquidation channels for retailers and brands. The trick was to acquire members via online marketing and email, convert them to buyers, and then re-engage them via daily sales and push marketing.

Positives: Inventory light or free (upfront purchase and quick sale), decent consignment margin (~25-30%) and strong consumer value proposition. Consumers flocked to the best deals site which in turn caused them to grow incredibly quickly. Being able to buy luxury items at a huge discount was both exciting and exhilarating.

Challenges: Consumers had no brand loyalty and would just flock to whichever site had the best deals. Flash businesses are VERY sourcing intensive from an inventory standpoint (small lots and lack of repetition) and merchandise is critical and seasonal. You also need premium brands to drive conversion. Tough to scale largely because merchandising is just so labor intensive and expensive.

Ecommerce Marketplaces

Theme: Self-sustaining transactional marketplace or community with network effects.

Positives: Sellers become buyers and buyers become sellers. Strong repeat use case and engagement which drives organic traffic. Solves many of the problems that other ecommerce businesses face, namely getting people to come back to your site. Arguably a better business model than most other commerce models when done right.

Challenges: Difficult to get the flywheel going and tough to manage community dynamics. Amazon dominates most categories. Lack of control over customer experience.

Mobile-First

Theme: New and disruptive commerce opportunities on the go.

Positives: Mobile enables a "lean-back" one finger scrolling experience for discovering new products. Smart targeting on mobile using push notifications to nudge consumer with offers and discounts throughout the day. Since your phone is always with you, there are unique and exciting commerce opportunities to be had. New business models are emerging such a real-time all-day virtual auction houses via platforms like Tophatter, or next-gen mobile Craigslist apps such as Wallapop and OfferUp.

Challenges: Retention. Like many other mobile-only businesses, if you are not one of the top apps that people are using, then you are probably not relevant for very long. Poor retention plagues many mobile commerce companies which in turn pummels lifetime value.

What Have I Learned?

I've learned that ecommerce businesses are tough but there are many pros and cons to consider. Start-ups and investors should study each model and understand what worked well and what didn't. Despite the failures, there are many exciting companies that are creating a ton of value and continuing to innovate. Let's not forget that retail ecommerce is a $350B market and growing quickly!